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Regulation NMS OATS

Additional Guidance Regarding the OATS Routing Method Code of “I” and Special Handling Code of "ISO"

Frequently Asked Question

Are there any Order Audit Trail System (OATS) reporting obligations for NASDAQ securities relating to Regulation NMS?

Yes. For orders subject to the OATS Rules, members will be required to identify on the applicable OATS report the receipt and routing of an ISO. Specifically:

A new Special Handling Code of “ISO” has been added to the New Order Report, Combined Order/Route Report, Combined Order/Execution Report and Cancel/Replace Report to reflect the receipt of an ISO by a trading center; and

A new Routing Method Code of “I” has been added to the Route Report and Combined Order/Route Report to identify orders, or portions of orders, that are routed to another trading center and identified to such trading center as an ISO. The ISO Special Handling Code for trading centers receiving an ISO was mandatory on July 9, 2007, the Pilot Stocks Phase Date under Regulation NMS. The Routing Method Code “I” for members routing ISOs to other trading centers became available on June 11, 2007, but will not be mandatory until February 4, 2008. This will provide firms with additional time to program for the new code. For illustrative purposes, the following are examples of the applicability of these new OATS codes:

Example #1: “ISO” Special Handling Code: An ADF trading center is displaying a protected quotation in the ADF. Another broker-dealer wishes to access this protected quotation by routing an ISO to execute against its full displayed size, as required by SEC Rule 611(b)(6). This broker-dealer therefore routes an ISO to the ADF trading center to access the protected quote. OATS reporting obligations of the ADF trading center in Example #1: The ADF trading center must submit to OATS: (1) a New Order Report with a Special Handling Code of ISO to reflect the receipt of an order; and (2) an Execution Report reflecting execution of the routed ISO, if applicable.

Example #2: “I” Routing Method Code: A member firm intends to utilize the ISO exception to the trade-through rule to obtain executions for an order that it has received from its customer. To satisfy its obligations under SEC Rule 611, the member firm routes ISOs, which it chooses to send on an agency basis, to execute against the relevant protected quotations. OATS reporting obligations of the member firm in Example #2: The member firm must submit to OATS: (1) a New Order Report reflecting receipt of the order from its customer; (2) a Route Report for each ISO sent, on an agency basis, to another trading center with a Routing Method Code of “I” and a Destination Code reflecting the specific exchange or trading center to which the order was routed; and (3) to the extent that the member routed the ISOs, on an agency basis, with the intent of executing on a principal basis the balance, if any, of the customer order not satisfied by the routing (and subsequent execution, if any) of such ISOs, an Execution Report to reflect the execution of the balance of the block order with its customer.